icicidirect_indiainfoline_initiatingcoverage

8/9/2019 ICICIdirect_IndiaInfoline_InitiatingCoverage

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February24, 2010

ICICIdirect.com|Equity Research

nitiating Coverage

Next delta missing for steep growthIndia Infoline (IIFL) has diversified its core business of equity broking toa widespread bunch of financial services. Broking revenues contribute~55-60% to the total topline, financing income ~22-23% whileinsurance distribution & online media contribute 10% to the totalincome. IIFL commands ~3.7% market share of total market volumesclocking Rs 3700 crore daily volume. We expect IIFL to maintain a stablemarket share. This will lead to revenue CAGR of 14% (FY12E Rs 1431crore) and PAT CAGR of 19% (FY12E-Rs 246 crore).

Higher broking yields to help 17% CAGR in broking income

IIFL has a market share of ~3.7%. With the anticipated average daily

market turnover rising from current levels of Rs 90,000-95,000 crore to Rs1,20,000-1,25,000 crore by FY12E, we believe yields will stabilise around 8bps. This should help it to generate brokerage income at 17% CAGR overFY09-FY12E to Rs 844 crore.

Financing business to be driven by margin funding, LASWe expect the financing book to grow from the current Rs 1200 crore toRs 1480 crore by FY11E and Rs 1710 crore by FY12E implying 21% CAGRover FY09-FY12E. Margin funding, which constitutes ~40% of the fundingbook will allow yields to be maintained at 15-16%. This will enable 13%CAGR in NII to Rs 333 crore by FY12E.

Higher operating leverage leads to lower than peers EBIDTA margins

EBIDTA margin fell from 33% and 39% in FY07 and FY08, respectively, to30% in FY09. The margins are lower compared to listed peers on accountof higher proportion of owned branches resulting in higher operating ratioof approximately 18%. The company has lately shifted to the blendedmodel, which will improve its EBIDTA margin to 32% by FY12E.

ValuationsAt the CMP of Rs 111, the stock is ruling at 13.3x and 12.8x its FY11E andFY12E EPS, respectively. The stock has historically traded at a premium tomarket multiples due to its diversified revenue stream and higher thanindustry blended yields of ~8 bps. RoEs are expected to stay in the rangeof 13-14% in the next two years. Since we do not expect steep rise inbottom line till FY12E, we havent ascribed any premium to the market

multiple (15x FY11E EPS) thereby valuing the stock at Rs 121/share.Exhibit 1:Key Financials

FY08 FY09 FY10E FY11E FY12E Total Revenue 1023.6 963.1 1183.9 1247.6 1431.0 PAT 159.9 144.8 229.3 236.0 245.7 EPS 6.6 5.1 8.1 8.3 8.7 PE (x) 16.8 21.7 13.7 13.3 12.8

PBV (x) 2.1 2.0 1.8 1.7 1.5 RoCE 28.2 13.5 22.8 20.0 18.8

RoNW 21.3 10.4 15.1 13.9 13.2 Source: Company, ICICIdirect.com Research

India Infoline Limited (INDINF)

Rs 111

ting Matrix

ting : Add

rget : Rs 121

rget Period : 12-15 months

tential Upside : 9%

Y Growth (%)

FY09 FY10E FY11E FY12E

tal Revenue -5.9 22.9 5.4 14.7

TDA -27.3 48.4 0.1 5.8

t Profit -17.7 66.7 2.9 4.1

ock Data

oomberg Code IIFL.IN

uters Code IIFL.BO

ce value (Rs) 2

omoters Holding 34%arket Cap (Rs cr) 3181

week H/L 173 / 40

nsex 16100

verage volumes 188000

omparative return matrix (%)

ock return (%) 1m 3m 6m 12m

dia Infoline -16 -23 -12 110

elweiss -12 -15 -3 59

OSL -11 -3 8 169

ligare -4 2 0 21

ice movement (Stock vs. Nifty)

20

60

00

40

80

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

1000

2000

3000

4000

5000

6000

India Infoline Nifty (RHS)

nalysts name

Kajal Gandhi

[email protected]

hirag Shah

[email protected]

Viraj Gandhi

[email protected]


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ICICIdirect.com|Equity ResearchPage 2

Company background

The India Infoline group, comprising the holding company, India InfolineLtd and its wholly-owned subsidiaries, straddles the entire financialservices space with offerings ranging from equity research, equities &

derivatives trading, commodities trading, PMS, mutual funds, lifeinsurance, FD, GoI bonds and other small savings instruments to loanproducts and investment banking. India Infoline also owns and managesthe websites www.indiainfoline.com and www.5paisa.com. The companyhas a network of 1,814 business locations (branches and sub-brokers)spread across 365 cities and towns. It has more than 7.5 lakh customers.

Exhibit 2:Evolution of IIFL

1995---Established

2009--- Received

registration for

housing finance

business2006---Launched

IB service2004---Acquired

commodity broking

license

2005---Listing on

SE2000---Launch of

online trading

portal

2008---Acquired

senior member

team of CLSA

Source: Company, ICICIdirect.com Research

Exhibit 3:Financial performance

36 77

218

426

1024963

889

0

200

400

600

800

1000

1200

FY04 FY05 FY06 FY07 FY08 FY09 9MFY10

(RsCrore)

20

30

40

50

(%)

Revenues EBIDTA margin (RHS)


Shareholding pattern (Q3FY10)

Shareholder Holding (%)

Promoters 33.8

Institutional investors 39.3

Other investors 27.0

Promoter & Institutional holding trend (%)

34 34 34 34

39 39

3334

28

32

36

40

Q3FY10 Q2FY10 Q1FY10 Q4FY09

(%)

Promoter Holding FII & MF


3/24



Investment Rationale

India Infoline has a diversified revenue stream. The enhanced distributionplatform (spread over 2,100 locations) helps the company to generatehigher retail volumes as a result of larger retail customer base (7.5 lakh).

Even on growing market volumes, we expect IIFL to maintain its marketshare of ~3.7% and protect yields @8 bps, which will enable 17% CAGRin broking revenues over FY09- FY12E to Rs 844 crore. Despite higher-than-industry yields, the company has a comparatively lower EBIDTAmargin of 30% (FY09) on account of higher proportion of owned branchesresulting in higher employee cost of 26% and operating expenditure of29% of total income. The shift towards the blended model (own branchesand franchise) will enable the company to improve its EBIDTA margin to32% by FY12E. On account of the above factors, we expect 19% CAGR inPAT over FY09-FY12E to Rs 246 crore.

Higher yields, stable market share to enable 17% CAGR in broking income

Brokerage income contributed 57% and 55% in FY08 and FY09,respectively, to the total income of the company. We expect this share toinch up ~60% by FY12E on the following supposition. We expect the totaldaily market turnover to increase from current levels of Rs 90,000-95,000crore to Rs 1,20,000-1,25,000 crore by FY12E (Refer Annexure 1). Weanticipate that IIFL will maintain its market share of ~3.7% and protectyields @8 bps. Hence, we expect 17% CAGR over FY09-FY12E inbrokerage income to Rs 844 crore. Broking volumes are dominated byretail segment volumes for IIFL.

Exhibit 4:Contribution of brokerage income to total income still high despite diversification

590

533

177

194

178

720

745 8

44

1023

963

256

314

320

1185

124 9

422

0

200

400

600

800

1000

1200

1400

1600

FY08 FY09 Q1FY10 Q2FY10 Q3FY10 FY10E FY11E FY12E

(RsCrore)

0

20

40

60

80

(%)

Brokerage income Total Income Contribution (RHS)


We anticipate a stable market share for IIFL till

FY12E @ 3.7%


4/24



Exhibit 5:Market share likely to consolidate at current levels

3.03.3 3.4 3.3

3.9 3.93.6 3.5 3.7 3.6 3.6

3.93.7 3.73.83.6

1000

2000

3000

4000

5000

Q1FY08

Q2FY08

Q3FY08

Q4FY08

FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

FY09

Q1FY10

Q2FY10

Q3FY10

FY10E

FY11E

FY12E

(RsCrore)

1

2

3

4

5

(%)

Average daily turnover Market share (RHS)


Market dynamics and IIFLs focus area of operationThe retail segment has contributed over 50% to overall market volumes inthe past couple of years. The share of retail participation did fall from over57% in FY08 ~53% in FY09. This was on account of volatile marketconditions. The share has again picked up in the current year to 57%. Weexpect this share to gradually move up to 58-59% in the coming period.IIFL has been successful in generating more than half of its volumes fromthe retail segment (~60%), which provide higher than industry yields. Themultiple delivery channel of IIFL facilitates in acquiring retail clientele.

Exhibit 6:Retail segment contributes more than half of overall market turnover(%) FII DII Prop Retail

FY08 16 6 23 55

FY09 15 6 26 53

H1FY10 11 5 27 57 Source: Company, ICICIdirect.com Research

Emergent retail client baseIIFL had adopted a very aggressive branch expansion strategy duringFY06. This helped the company to expand its retail reach, which rosemultifold during that period from 5,500 in FY05 to 75,000 in FY06 and7,50,000 by December 2009.

Exhibit 7:Retail client base expanding rapidly

550075000

150000

438864

596056

750000

0

100000

200000

300000

400000

500000

600000

700000

800000

FY05 FY06 FY07 FY08 FY09 9MFY10


Retail participation in overall market volumes is more than 50% and yields from the retail segment are comparatively higher compared to theinstitutional segment.

Overall market volumes have tilted more towards

the derivative segment


5/24



Exhibit 8:Industry dynamics for client base

120

220

3

20

434 4

92

55 7

5

150

439

596

60

159

238

396

471

0

100

200

300

400

500

600

700

FY05 FY06 FY07 FY08 FY09

(Numbers

in000)

Kotak Securities India infoline Motial Oswal


Offline and online portal helps to generate more retail volumesOne of the major reasons for such an invigorating spreading out of retail

clients (7.5 lakh) is the growth in the offline platform. IIFL doubled itsdistribution platform in FY06 and followed it up with over 200% growth inFY07. The company was more inclined towards the owned branch model,which led to higher operating cost and lower PAT margin. This weighedheavily on the company during the downturn of FY09 where the EBIDTAmargin came down from 39% in FY08 to 30% in FY09. IIFL has latelyshifted to the blended model of branch expansion. During the downturnof FY09 IIFL expanded its reach to 1,361 business locations butrationalised owned branches from 607 to 428. This shows its inclinationtowards the blended model. The company is currently spread over 2,100business locations with 500 owned branches.

Exhibit 9:Branch additions

-50

0

50

100

150

200

250

300

FY06 FY07 FY08 FY09

(%)

Kotak Securities India infoline

Motilal Oswal Religare


Exhibit 10:Shifting towards the blended model

758

1361

2100

607

428

500

0 1000 2000 3000

FY08

FY09

9MFY10

Business locations Owned


Better yields to boost broking incomeThe company manages to generate Rs 3700 crore of average dailyturnover (ADT), of which ~60% is contributed by retail participants (asindicated by management). The focus area of the company has alwaysbeen the retail segment, which enables the company to maintain higher-than-industry yields (blended) of around 8 bps. Another reason for higherblended yields is the inclusion of processing fees in brokerage revenues.Going forward, we expect yields for IIFL to stabilise around 8 bps tillFY12E.

Multiple delivery channels help in acquiring more

retail clients

The brokerage income also includes processing fees,

which results in higher yields for the company


6/24



Exhibit 11:Higher-than-industry yields

2

4

6

8

10

12

FY08 FY09 FY10E FY11E FY12E

(bps)

Edelweiss Kotak Motilal Oswal India Infoline

Calculated yields


IIFL manages to report above industry blended yields of ~8 bps. Theyields for other players like Motilal Oswal and Kotak Securities rangesaround 5-6 bps while for Edelweiss it is a little lower at 4 bps.

The company had taken a strategic decision in FY08 by inducting the four-member senior management team of CLSA to strengthen its presence onthe institutional side also. This boosted the sales, market share and reachof the company. We have assumed that the institutional segment of IIFLwill contribute nearly 38-40% of the total turnover.

Our recent interaction with the management indicated that the companywill consolidate its position in the industry to maintain its market share at

current levels of ~3.7%. This indicates that the company is not looking toaggressively expand its operations. We expect its market share to stay atcurrent levels since it has already expanded well in most segments likeonline, offline, institutional vertical, etc. Therefore, we have modelled in25% CAGR in volumes to Rs 4300 crore leading to 17% CAGR inbrokerage revenues over FY09-FY12E to Rs 844 crore.

Exhibit 12:Trend in broking revenues

231

588

533

720745

844

100

300

500

700

900

FY07 FY08 FY09 FY10E FY11E FY12E

(RsCrore

)


The market share of the company was lingering

around 1.9% in March 2006. It started to gain

traction from Q1FY08 after acquiring CLSAs senior

member team and is currently at 3.7%

The management is looking to consolidate its

position in the market at current levels


7/24



Financing business to be driven by margin funding business

The loan book of IIFL, which was more tilted towards mortgage andpersonal loans, has been shifting focus towards margin funding in thepast five to six quarters. The growth in lending book from Rs 956 crore inFY09 to Rs 1200 crore by December 2009 can be attributed totally tomargin funding that grew from Rs 120 crore to Rs 384 crore. In contrast,whereas other avenues like mortgage loans grew from Rs 516 crore to Rs564 crore, personal loans are consistently sloping down while loanagainst shares (LAS) is steady at Rs 132 crore. We expect the fundingbook to grow at 21% CAGR over FY09-FY12E to Rs 1710 crore. The yieldfrom the funding book was ~15-16% due to higher proportion of marginfunding (~40% of total funding book). We expect yields to stay at theselevels till FY12E with an upward bias as we enter a higher interest ratescenario. We expect 13% CAGR in NII to Rs 333 crore over FY09-FY12E.

Exhibit 13:Traction in funding book

1042 1096

838956 922 910

1200 1250

1480

1710

500

1000

1500

2000

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

FY10E

FY11E

FY12E

(RsCrore)


The company launched its consumer finance business in FY07 where itstarted focusing on retail loans to add to its mortgage funding business,which was already doing well. The disbursement of personal loans wasstopped in August 2008 just after a couple of quarters of its inception tocontrol asset quality. This helped to keep a check on asset quality, withNPA below 1% of loan book currently. The loan book size currently is Rs1200 crore. We expect the book size to rise to Rs 1480 crore by FY11Eand Rs 1710 crore by FY12E implying 21% CAGR over FY09-FY12E.

Exhibit 14: Break-up of funding book

247

391

604

516

516

464

56

4

83

211

207

172

157

146

120

442

273

217

115 1

57

155

384

165

167

68

153

92

146

132

0

100

200

300

400

500

600

700

FY08 Q1FY09 Q2FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10

(RsCrore)

Mortgage Personal loan Margin funding LAS


The margin funding business does well under stable

market conditions and when the IPO pipe line is

strong, which is the case currently


8/24



Growing funding book, stable yields to support NII growthThe yield on the funding book is hovering around 15-16% due to largershare of capital market related lending. We expect this to stay stable inthe coming period. The interest expense is likely to move up marginally from the current zero levels owing to growth in debt levels. Growing

funding book and stable yields will enable 13% CAGR in NII over FY09-FY12E to Rs 333 crore.

Exhibit 15:Trend in net interest income

050

100

150

200

250

300

350

400


(RsCrore)

050

100

150

200

250

300

350

400

(RsCrore)

Interest Income Interest Expense NII (RHS)


Exhibit 16:Contribution of financing income to total income

19

28

20 21

2325

0

5

10

15

20

25

30

FY08 FY09 9MFY10 FY10E FY11E FY12E

(%)

Finance and Investment income as % of T. Income


Despite insignificant growth in the funding book in FY09, NII for IIFL grewover 127% from Rs 103 crore to Rs 232 crore. This was on account oflarger interest income (liquidity crunch in FY09 allowed the company tolend at higher rates ~ 22-24%) and since it has got IPO money to lendwith no debt. The interest cost reduced drastically from Q3FY09 since thecompany repaid loans, which were outstanding on the books. This led toa drastic fall in the interest expense cost from Rs 91 crore in FY08 to Rs 33crore in FY09. Currently, interest expenditure is near zero levels onaccount of very negligible debt on books. However, we expect debt levelsto rise gradually. Hence, we expect NII growth@ 13% CAGR to Rs 333crore.

We believe the loan book provides yields of 15-16%.

On the other hand, high net worth and low debt

leads to lower interest outgo for IIFL keeping

spreads high

Contribution of interest income to total income is

expected to improve owning to growth in funding

book and stable yields


9/24



Exhibit 17:Contribution of financing income to total income to moderate slightly

194

265248

285

351

0

50

100

150

200250

300

350

400


(RsCrore

)

0

5

10

15

20

25

30

(%)

Financing income Contribution to total income (RHS)


Low gearing: Room for expanding lending business rapidlyThe net worth of IIFL is expected to rise from Rs 1545 crore in FY09 to Rs2072 crore by FY12E. The company currently operates at very low gearingratio of 1.2x, which shows the conservative approach of the management.Thus, there is more scope to expand its funding business during stablemarket conditions.

Exhibit 18:Low gearing: Scope for expanding asset base further

325

1489

1545

1713

1886

2066

2.52.2

1.81.6 1.71.6

0

500

1000

1500

2000

2500

FY07

FY08

FY09

FY10E

FY11E

FY12E

(RsCrore)

1

1

2

2

3

3

(x)

Networth Gearing (RHS)

Gearing: Total assets/ Net worth


There is an opportunity for rapid expansion of the

funding book in a conducive market environment


10/24



Other business areas likely to grow steadily

Share of online media, asset management, commodity broking andinvestment banking to total income drifted down from over 22% in FY07to just over 11% in FY09. IIFL was sole manager for Cox & Kings in

Q3FY10, which led to growth in IB fees in Q3FY10 to Rs 29 crore. Weexpect a marginal improvement in performance from these segmentsand expect them to contribute ~13% to total revenues by FY12E.

Exhibit 19:Contribution to total income

0

2

4

6

8

10

FY08

FY09

FY10E

FY11E

FY12E

(%)

Marketing & online media Commodities Wealth management IB


Asset/wealth managementAssets under management have now crossed Rs 5000 crore spanningover 1,400 family accounts. Recently, the company successfully sold

IPO applications specifically in the non-institutional segment for NHPCand Oil India and Cox and Kings in FY10. We expect asset managementfees to grow gradually from Rs 20 crore in FY08 to Rs 44 crore in FY12Eimplying 34% CAGR over FY08-FY12E.

Exhibit 20:Growth in asset management fees

12

19 18

26

36

4144

0

10

20

30

40

50

FY07 FY08 FY09 9MFY10 FY10E FY11E FY12E

(RsC

rore)


We expect a strategic shift of gear towards wealth management as isthe case in most developed countries. However, these business lineswill take time to contribute significantly to the total revenues in theIndian context.

Developed countries have moved towards asset

management model


11/24



Are we moving in the same direction?Let us examine the case of Charles Schwab in this context.Exhibit 21:Charles Schwab revenue contribution shifting towards asset management fees

27

49

21

47

31

19

50

2422

45

18

4947

17

4546

21

37

0

10

20

30

40

50

60

Asset management Trading (Broking + Prop) NII

(%)

2000 2004 2005 2006 2007 2008


As depicted above for Charles Schwab, revenue contribution from tradingdeclined from 50% of total income to 21% over a period of nine yearswhile that of the AMC rose from 21% to 46%.

If this is the model that can evolve in our markets then we can expect ahigher contribution from asset management fees though not in ourinvestment horizon. However, this could possibly be the next potentialgrowth driver.

Investment banking

IB fees increased from Rs 3 crore in FY07 to Rs 16 crore in FY08 andfurther to Rs 33 crore in 9MFY10. We expect 107% CAGR in IB fees toRs 21 crore by FY12E.The increase in PE deals lately and improvement in M&A activity hasenabled IIFL to gradually grow its IB fees. We expect the M&A marketcan grow at 20-25% next year to $600 $700 million. The recent peakwas in 2007 when we saw a pool of close to $800 million. The fee in thisbusiness varies from 1% to 3%. WE see this as an opportunity to growIB fees for IIFL.

Exhibit 22:Public equity deals

5280

38 25 18 8 8 2054

293

371 407

40

102

17 13

208

403

-100

0

100

200

300

400

500

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

No. of Deals Volume (Rs billion)


Exhibit 23:Private equity deals

115

139 133

77

116

6343 47 47

165182

158

120138

57

3146

37

0

50

100

150

200

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

No. of Deals Volume (Rs billion)


Recent Investment banking deals

QIPs of Gammon India and KSK Energy Ventures Sole BRLM for the Cox & Kings IPO Sole management of Cox & Kings BRLM for the Infinite Solutions IPO

Asset management fees could rise exponentially

though not in our investment horizon

IB fees are lumpy in nature and hence income from

this segment could rise steeply.


12/24



Life insurance distribution: losing groundIIFL was a corporate agent of ICICI Prudential. The company has recentlyreceived an insurance broking license, which enables it to distributeproducts for multiple players. IIFL has already tied up with Max life, MetLife, Reliance Life, Kotak OM life and ICICI Prudential Life for distribution

of insurance products.

We have considered 16% CAGR in amount mobilised over the nextcouple of years to Rs 425 crore by FY12E. We expect stable marketconditions and tie-up with other players to enable the company to deliverbetter growth from FY11E. We expect the amount mobilised by thecompany to grow by over 50% YoY to Rs 330 crore in FY11E and furtherto Rs 425 crore in FY12E. Distribution commissions will moderate down from current 15-16% to 12-13% by FY12E on account of pressure onagency commissions. We expect distribution fees to grow at a moderate5% CAGR over FY09-FY12E to Rs 55 crore on higher volume growth.

Exhibit 24:Commission income for insurance premium mobilised

0

4

8

12

16

20

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

(RsCrore)


The performance from the insurance business is a little subdued since thecompany is consistently losing its market share, which was over 2.8% inQ1FY09 to below 1.4% by the end of Q3FY10. Despite its increasing reachand growing retail base to nearly 7.5 lakh customers the company wasunable to gain traction in insurance distribution income.

Exhibit 25:Amount of insurance mobilisation to grow well from FY11E

270

216

331

425

0

50

100

150

200

250

300

350400

450

FY09 FY10E FY11E FY12E

(RsCrore)


Distribution commission (%) is likely to fall further.

Volume growth will drive revenues from this

segment

The management has indicated that most of the

employees in the insurance business are on variable

pay except the top management


13/24



Marketing and online mediaThe growth in this segment is very encouraging but one also needs tounderstand the low base effect. This segment grew at 112% CAGR overFY04-FY09 from Rs 2 crore to Rs 71 crore. We expect it to grow at 6%CAGR over FY09-FY12E to Rs 85 crore and contribute 6% to the topline.

Exhibit 26:Online media income growing well

26

20

65

7871

62

74

85

0

40

80

120

FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E FY12E

(RsCrore)

0

4

8

12

16

(%)

Online media Contribution to T.Income


Income in this segment is generated from the sale of space on proprietarywebsite, www.indiainfoline.com and related marketing and promotionalactivities undertaken through the distribution network. This also includesrevenues generated by way of sponsorship and sale of research reportsand customised assignments.

We expect steady growth from the online media

segment


14/24



Diversification arrests steep decline in toplineBrokerage income, which contributes ~ 54-55% to the total topline of IIFL,is comparatively lower compared to its listed peers like Edelweiss andMotilal Oswal where the share ranges between 65% and 70%.Diversification into related business streams like commodity broking,

investment banking, PMS, wealth management, etc, helped IIFL to arrestthe fall in total topline during volatile market conditions.Exhibit 27:Edelweiss topline break-up (%)

50

6

43

65

4

30

58

8

34

64

2

32

0

20

40

60

80

Brokerage*

Financing

&

Investment

Interest

income


*Brokerage includes treasury income


Exhibit 28:Motilal Oswal topline break-up (%)

68

146 11

78

123 6

73

10 4 9

70

12 6 11

0

20

40

60

80

100

Brokerage

Fund

Based

AMC IB



Exhibit 29:Contribution to topline for IIFL

5258

69

50

5954

48

6269

6258

14 14 12

2924

2937

18 1923 22

15

6 6 6 6 3 5 3 4 5

12 9 9 87 7 7

94 3 7

15

0

20

40

60

80

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

(%)

Equity brokerage Financing and Investment

Life insurance & Investment Marketing & online media


Topline sustained during volatile period

IIFL managed to sustain its market share of ~3.7% when most otherbrokerages lost their market share in the past two years. Hence, thebroking income of IIFL saw a marginal decline from Rs 590 crore to Rs 533crore in FY09. Financing and investment income came to the rescueduring that period. It grew from Rs 194 crore to Rs 265 crore in FY09.Other avenues like commodity brokerage, online media and wealthmanagement, etc showed a very stable performance keeping a check onthe fall in topline.

Exhibit 30: Market share maintained by IIFLJun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Edelweiss 7.4 6.8 5.6 5.1 4.7 4.3 4.8

India Infoline 3.8 3.8 3.4 3.4 3.5 3.6 3.9

Motilal Oswal 4.6 4.5 3.9 3.8 3.7 3.4 2.9

Kotak Securities 6.3 5.6 4.8 4.7 4.5 4.4 3.9

Reliance money 3.6 3.2 3.9 2.7 1.7 1.6 1.6 Source: Company, ICICIdirect.com Research

Unlike Edelweiss that has higher dependence on

treasury income, IIFL has a much diversified revenue

stream

Contribution from other sources is likely to remain

stable

Only IIFL was able to maintain its market share in

the past eight quarters whereas all other players

have lost considerably


15/24



Exhibit 31:Topline resilient during volatile times

1330

1024

687

108

6

720

963

445

896

-6.0

-35.3

-17.5

-45.9

0

400

800

1200

1600

Kotak Securities IIFL Motilal Edelweiss

(Rscrore

)

-50

-45

-40

-35

-30

-25-20

-15

-10

-5

0

(%)

FY08 FY09 YoY (RHS)


Major arena already explored: new delta missingIIFL has explored all major business lines. Hence, we expect the companyto grow along with market volumes, which will enable it to maintain itsmarket share of ~3.7% and generate volumes of Rs 4400-4500 crore byFY12E. Total income of the company has grown at 50% CAGR over FY07-FY09. However, we expect consolidation at current levels. Hence, wehave modelled in 14% CAGR over FY09-FY12E to Rs 1421 crore.

There is no visible avenue, which can bring runaway

growth from these levels


16/24



Risk and Concerns

Greater volumes from derivatives segment to hurt yieldsIIFL enjoys higher-than-industry yields because of its share of cash marketvolumes. Currently, the average cash: derivatives ratio lies around 30:70.

However, a higher derivative share will impact IIFL to that extent. Weexpect the share of the derivatives segment to inch up from currentlevels. Hence, we have factored in falling yields for the company to thatextent. Still, any further dip in yield will impact the profitability to thatextent.

Lull in capital market volumesLately, capital market volumes have picked up and stabilised around Rs90,000-95,000 crore. We expect a steady rise in volumes over the nextcouple of years in our markets. If the volumes dry up in our markets, theywill impact the company to that extent since brokerage income will bedirectly impacted negatively.

Increasing competition in online & institutional spaceWe have factored in falling yields for the company in the wake of fallingcash segment volumes and growing competition in the online andinstitutional space. The management is not aggressively expanding itsoperations currently. Hence, higher pressure on account of competitionfrom unorganised players may result in a faster drop in market share and,thereby, profitability.

Rapid expansion of distribution platform to hurt marginThe company is currently rationalising its distribution platform, which iskeeping a check on the fall in EBIDTA margin and, hence, the PAT margin.

This was a reaction to the downturn of FY09. However, since marketshave stabilised now rapid expansion to capture a larger pie of the growingmarket turnover could impact the EBIDTA margin and our estimate, tothat extent.


17/24



Financials

Diversified topline

The total revenue growth for IIFL has been steady even during uncertainmarket conditions. The total income grew at 50% CAGR over FY07-FY09

from Rs 426 crore to Rs 963 crore. We expect 14% CAGR over FY09-FY12E to Rs 1421 crore. Traditionally, brokerage income has contributed54-55% to total income. We do not see a substantial change in therevenue mix, which becomes largely dependent on consumer finance andinsurance distribution income in a single year. Since most areas havealready been explored, we do not expect a drastic shift in the revenuestream from current levels.

Exhibit 32:Topline distribution for IIFL

5457 55

61 60 59

8

19

28

21 2324

149

5 4 4 49 7 5 6 6

86 5

9 8 7

15

0

10

20

30

40

50

60

70


(%)

Brokerage Financing and Investment Life insurance Marketing and online media Others


Higher operating leverage leads to lower EBIDTA margin

Currently, employee cost is hovering around 26% of the total income,which is higher than peers that range between 16%-17%. At the sametime, the operating expense is at 29%, which is also higher than others.This higher expense ratio is due to the aggressive branch expansion doneby IIFL. The company has lately shifted to a blended model, which bodeswell and would enable it to contain its employee cost around 27% of thetotal income, which spiked up to 34% during the volatile period ofQ4FY09.Exhibit 33:Employee cost as % of total income is likely to inch up going forward

26 26

2124 23

27

3134

28

2523

25 2627

25

10

20

30

40

Q1FY08

Q2FY08

Q3FY08

Q4FY08

FY08

Q1FY09

Q2FY09

Q3FY09

Q4FY09

FY09

Q1FY10

Q2FY10

FY10E

FY11E

FY12E

(%)

Employee cost as % to total income(RHS)


No major shift in revenue mix expected till FY12E

The employee strength is not expected to grow

rapidly from current levels, which will enable IIFL to

control employee cost


18/24



EBIDTA margin lower than peers

The EBIDTA margin fell from 33% and 39% in FY07 and FY08,respectively, to 30% in FY09.Other listed players like Motilal Oswal and Kotak enjoy a higher EBIDTAmargin compared to IIFL. The major reason for lower margins is the

higher cost structure of IIFL. Employee expense to total income rangesbetween 27% and 28%. The shift towards a blended model will improvethe EBIDTA margin to 32-33% by FY12E.Exhibit 34:Comparative study of EBIDTA margin

33.2

39.3

30.3

36.6

34.8

38.1

39.2

39.5

41.9

42.9

43.8

43.6

23.2

40.0

35.0

0 20 40 60 80 100 120 140

FY07

FY08

FY09

FY10E

FY11E

(%)

IIFL MOSL Kotak


PAT margin maintained at higher teensThe PAT margin, which slipped from 18% during FY07 to 15% in FY09, islikely to stabilise around 17-18% by FY12E. We expect PAT to grow at19% CAGR over FY09-FY12E to Rs 245 crore.Exhibit 35:Bottomline margin to improve with improving EBIDTA

18

1615

19 19

17

10

14

18

22


(%)


Exhibit 36:RoE to stabilise around 14%22.9

10.1

15.214.0 13.3

6

11

16

21

26


(%)


Shift towards a blended model will help in containing

cost and improving the EBIDTA margin

The EBIDTA margin is showing early signs of

improvement in the past three quarters

RoE could get dragged down if convertible warrants

issued by the company get exercised


19/24



Valuation

At the CMP of Rs 111, the stock is ruling at 13.3x and 12.8x its FY11E andFY12E EPS, respectively. The stock has historically traded at a premium tomarket multiples due to its diversified revenue stream and higher than

industry blended yields of ~8 bps. RoEs are expected to stay in the rangeof 13-14% in the next two years. Since we do not expect steep rise inbottom line till FY12E, we havent ascribed any premium to the market

multiple (15x FY11E EPS) thereby valuing the stock at Rs 121/share.

Exhibit 37:Brokerages do tend to move in sync with broader market multiples

5

10

15

20

25

30

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

P/E

(x)

BSE Sensex Indiainfoline Edelweiss Motilal Oswal


Exhibit 38:P/E band (1 year forward)Target P/E

Edel -15% 13

IIFL 0% 15

Motilal -10% 13

Kotak 15% 17

(Disc)/Prem to Sensex


The company has nearly 6 crore outstanding convertible warrants as onFY09. The option, if exercised, can drag down the EPS of the companyfrom Rs 8.3 to Rs 6.9 in FY11E and our fair value, to that extent will beimpacted negatively. We have not considered any such dilution in ourtarget price.

The BSE Sensex is trading at 15x its FY11E EPS


20/24



Exhibit 39:Premium/ (Discount) to Sensex

-60

-40

-20

0

20

40

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

(%)

Indiainfoline Edelweiss Motilal Oswal


Exhibit 40:Valuation ratiosFY08 FY09 FY10E FY11E FY12E

EPS 6.6 5.1 8.1 8.3 8.7

Diluted EPS 3.2 4.3 6.7 6.9 7.2

DPS 1.2 2.8 1.8 1.9 2.0

CEPS 7.7 6.9 10.4 10.8 11.2

Cash per Share 12.5 22.1 9.3 4.8 0.8

BV 51.9 54.5 60.4 66.5 72.9

PE (x) 16.8 21.7 13.7 13.3 12.8

PBV (x) 2.1 2.0 1.8 1.7 1.5


Exhibit 41:Margin picture(%) FY08 FY09 FY10E FY11E FY12E

EBITDA / Total Income 39.3 30.3 36.6 34.8 32.1

EBIT / Total Income 36.5 26.2 32.4 30.4 28.1

PBT /T Income 27.6 22.8 30.9 29.8 27.0

PAT / T Income 18.9 16.3 20.7 20.1 18.3

RoCE 28.2 13.5 22.8 20.0 18.8

RoNW 21.3 10.4 15.1 13.9 13.2 Source: Company, ICICIdirect.com Research


21/24



Exhibit 42:Profit and Loss AccountRs Crore FY08 FY09 FY10E FY11E FY12E

Brokerage Income 589.7 533.4 719.9 745.4 844.3

Financing and Investment 193.8 265.4 247.6 284.9 351.4

Life insurance & Investment 106.6 48.2 51.4 48.6 55.3

Marketing & online media 78.3 71.3 61.9 73.6 84.7

Othrer Income 55.3 44.9 103.1 95.2 95.4

Total Revenue 1023.6 963.1 1183.9 1247.6 1431.0

Direct cost 217.0 206.8 257.5 271.9 315.0

Employee Expense 242.6 273.7 297.6 326.3 392.1

Admin & General expense 161.8 190.4 195.1 215.5 265.1

Total Expenditure 621.4 670.8 750.1 813.8 972.2

EBIDTA 402.2 292.3 433.8 433.9 458.8

EBIDTA margin (%) 39.3 30.3 36.6 34.8 32.1

Amortization/ Depreciation 28.2 39.6 50.4 54.1 56.1

EBIT 374.0 252.7 383.4 379.7 402.7

Interest 91.3 33.2 18.4 9.6 17.4

PBT 282.8 219.5 366.0 371.6 386.9

Total Tax 89.8 62.2 120.7 120.6 125.5

PAT 159.9 144.8 229.3 236.0 245.7

Growth (%) 111.4 -9.4 58.4 2.9 4.1 Source: Company, ICICIdirect.com Research

Exhibit 43:Balance sheetFY08 FY09 FY10E FY11E FY12E

Fixed Asset 97.3 277.0 256.6 208.5 166.3

Investments 990.9 315.0 346.5 381.1 419.2

Loans & Advances 1271.3 1361.8 1697.5 2102.0 2524.0

Cash 356.5 626.9 262.9 137.0 22.0

Other current Assets 386.8 247.9 204.6 233.8 279.3

Total Assets 3224.1 2835.7 2775.1 3069.6 3418.0

Equity Capital 57.1 56.7 56.7 56.7 56.7

Prefrence Capital 59.8 11.4 11.4 11.4 11.4

Reserves & Surplus 1372.3 1476.7 1644.7 1817.9 1998.3

Total Networth 1489.2 1544.7 1712.7 1886.0 2066.4

Loans & Borrowing (Debt) 665.0 51.8 60.8 129.8 200.1

Secured loan 100.0 1.7 1.7 1.7 1.7

Unsecured loans 565.0 50.1 59.1 128.1 198.4

Other Current Liabilities 793.4 939.8 686.3 723.5 805.6

Total Liabilities 3224.1 2835.7 2775.1 3069.6 3418.0 Source: Company, ICICIdirect.com Research


22/24



Exhibit 44:Cash flow statementFY08 FY09 FY10E FY11E FY12E

Cash flow from Operating activities

Net Profit 239 219 366 372 387

Add: Depreciation 28 40 50 54 56

Add: Other Non Cash expense 9 9 - - -Less: Direct taxes paid 100 65 121 121 126

Add: Increase in other liabilities & provisions 448 118 (254) 37 82

Less: Increase in advances* 853 29 336 405 422

Less: Increase in Other current assets 202 (139) (43) 29 46

Add/(Less): Loans & borrowing/(Repayment)* 495 (613) 9 69 70

Net Cash flow from Operating activities 64 (182) (241) (22) 2

Cash flow from Investing activities

Add/(Less): Sale/(Purchase) of Fixed Assets (186) (106) (30) (6) (14)

Add/(Less) Investments in Subsidiaries (964) 676 (31) (35) (38)

Net Cash flow from Investing activities (1,150) 570 (61) (41) (52)

Cash flow from Financing activities

Add: Proceeds from issue of Share Capital 1,256 10 - - -

Add: Proceeds from issue of Preference Share 60 (128) - - -

Less: Dividend paid including tax - 61 63 65

Net Cash flow from Financing activities 1,316 (118) (61) (63) (65)

Net Increase / (Decrease) in Cash & Cash equivalen 230 270 (364) (126) (115)

Add: C&CE at the beginning of the year 127 356 627 263 137

(Increase) / Decrease in Net Current Assets 356 627 263 137 22

*We have coinsidered advances and borrowings as part of operating activites Source: Company, ICICIdirect.com Research


23/24



Annexure

Market turnover expected to rise from hereon..The turnover in the stock markets has grown at a healthy CAGR (cashvolumes have grown at a CAGR of 19% while the derivative segment hasgrown at a CAGR of 74% over FY03-FY09). We believe this surge is a

function of a host of variables like trend in nominal GDP growth, othermacro variables, FII participation, increased participation of local moneydirectly or via the MF route, vibrancy of primary markets, productinnovation and regulation and policy framework.We forecast a 29% CAGR for the stock market turnover over FY09-FY11E.We expect the average daily turnover to inch up to Rs 91,294 crore and Rs1,03,728 crore in FY10E and FY11E, respectively. Our modellingassumptions are based on the following variables:

Nominal GDP growth: We expect the nominal GDP growth to be at 14%and 14.5% in FY11E and FY12E, respectively. We believe this indicator isa reasonable proxy for FII flows, which highly influence stock marketturnover.

Financial savings/GDP ratio: Financial savings, historically, have beenskewed towards bank deposits. We now believe this will be favourable forthe equity asset class. We have modelled in a ratio of 20% and 20.5% inFY11E and FY12E, respectively. There is a growing trend of more localmoney getting into equities as is evident from the rise in retail equityclients for all listed brokerages and growth in demat accounts with NSDLand CDSL.Equity savings/GDP: We believe under-penetration/under ownership ofequities in India (5.8% of total financial savings in FY08 and FY09) will be abig driver for increase in market volumes. We are modelling in that 6%and 6.1% of financial savings will be directed into equitydirectly/indirectly, respectively. This will lead to a rise in market volumes.

Turnover velocity:The above positive factors coupled with buoyancy in

the primary market will surely inch up the turnover velocity for themarkets. We expect the turnover velocity to be at 1.6% and 1.62% inFY11E and FY12E, respectively.

Exhibit 45:Modelling market turnover(Rs Crore) 2008 2009 2010E 2011E 2012E

Nominal GDP 4320892 4933183 5549831 6326807 7244194

Growth (%) 13.8 10.7 12.5 14 14.5

Savings/GDP (%) 31.5 33.5 37 36 36

Savings 1361081 1652616 2053437 2277651 2607910

Fiancial Savings/GDP 19.0 19.5 19.5 20.0 20.5

Financial Savings 820969 961971 1082217 1265361 1485060

Equity Savings 47616 55794 64933 75922 90589

Equity Savings/Financial Savings (%) 5.8 5.8 6.0 6.0 6.1

Equity Savings/Total Savings (%) 3.5 3.4 3.2 3.5 3.7

Total annual turnover 18222565 14862809 22001903 25413344 29751832

Indian Retail 10022411 7877289 12012609 14425120 17664787

Others incl prop & FII 8200154 6985520 9989294.1 10988223 12087046

No of trading days 251 243 241 245 245

Average daily turnover 72600 61164 91294 103728 121436

Growth (%) 70.7 -15.8 49.3 13.6 17.1

Implied turnover velocity (%) 1.7 1.2 1.6 1.6 1.7Source: Company, ICICIdirect.com Research


24/24


RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assignsratings to its stocks according to their notional target price vs. current market price and then categorises themas Strong Buy, Buy, Add, Reduce, Sell. The performance horizon is two years unless specified and the notional

target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;Buy: Between 10% and 20%;Add: Up to 10%;Reduce: Up to -10%Sell: -10% or more;

Pankaj Pandey Head Research [email protected]

ICICIdirect.com Research Desk,ICICI Securities Limited,

7th Floor, Akruti Centre Point,MIDC Main Road, Marol Naka,Andheri (East)Mumbai 400 093

[email protected]

ANALYST CERTIFICATIONWe /I, Kajal Gandhi CA PGDBM MBA-CMresearch analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect ourpersonal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) orview(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:ICICI Securities Limited (ICICI Securities) and its affiliates are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are leadingunderwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage ofcompanies covered by our Investment Research Department. Our research professionals provide important input into our investment banking and other business selection processes. ICICI Securitiesgenerally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analystscover.

The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential andmeant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, withoutprior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors andemployees (ICICI Securities and affiliates) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securitiesfrom doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securitiespolicies, in circumstances where ICICI Securities is acting in an advisory capacity to this company, or in certain other circumstances.

This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. Thisreport and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financialinstruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of theirreceiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specificcircumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investmentobjectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluatethe investment risks. The value and return of investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities and affili ates accept no liabilities for anyloss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand therisks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject tochange without notice.

ICICI Securities and its affiliates might have managed or co-managed a public offering for the subject company in the preceding twelve months. ICICI Securities and affiliates might have receivedcompensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of public offerings, corporate finance, investmentbanking or other advisory services in a merger or specific transaction. ICICI Securities and affiliates expect to receive compensation from the companies mentioned in the report within a period of threemonths following the date of publication of the research report for services in respect of public offerings, corporate finance, investment banking or other advisory services in a merger or specifictransaction. It is confirmed that Kajal Gandhi CA PGDBM MBA-CM research analysts and the authors of this report have not received any compensation from the companies mentioned in the report in thepreceding twelve months. Our research professionals are paid in part based on the profitability of ICICI Securities, which include earnings from Investment Banking and other business.

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